The City regulator has launched a formal investigation into the suspension of Neil Woodford’s flagship investment fund amid criticism that the regulator was asleep at the wheel.
In a new blow to the one-time star fund manager, the Financial Conduct Authority chief executive, Andrew Bailey, revealed the investigation in a 10-page letter to Nicky Morgan, the Treasury select committee chair and MP.
The MP had asked the regulator to provide details of its contact with the embattled stock picker before his £3.7bn Equity Income Fund was closed to withdrawals on 3 June, and questioned the FCA’s “alertness to the problems”.
The fund’s suspension has trapped thousands of customer investments for at least four weeks.
A Woodford spokesperson said: “We can confirm we have been contacted by the FCA, regarding its investigation relating to the events that led to the suspension … and will be co-operating fully with its investigation.”
Questions have been raised over whether the regulator missed signs that Woodford was in trouble, as the rate of withdrawals from his poorly performing flagship equity income fund gained pace. It was finally gated when Kent county ouncil asked for the return of £263m.
In his letter, Bailey said the watchdog had been in contact with Link – the authorised administrator of the fund – since February 2018. Between April and December last year the FCA had held monthly monitoring discussions.
In February this year, the FCA said, it was told about the sale of a number of unlisted and illiquid investments in the fund to another Woodford fund – his Patient Capital Investment Trust.
Neil Woodford was once the UK’s biggest star fund manager, personally managing a £25bn mountain of money on behalf of pension funds and other investors at Invesco Perpetual. When he decided to quit Invesco and go it alone in 2013 it was a huge shock for the fund management industry. Invesco shares slumped by 7% on the day he announced his departure.
At Invesco Woodford held control of huge stakes in some of the UK’s biggest firms, and his opinions mattered. His criticism of AstraZeneca chief executive David Brennan in the 2012 shareholder spring was widely regarded to have cost him his job, and his critique of BAE’s attempted £28bn merger with Airbus is acknowledged as one of the reasons the deal collapsed.
Woodford, who was widely referred to in the media as an investment “hero” and fund management “star”, had done exceedingly well over his quarter century there. A £1,000 investment placed when he started at the firm in 1988 would have risen to £23,000 by the time he left.
Woodford accidentally fell into fund management and hadn’t heard of the term until he rocked up in the City in the 1980s sleeping on his brother’s floor while looking for a job. He got his first break in insurance, before drifting into fund management. He had left school wanting to fly fighter jets but couldn’t pass the RAF’s aptitude test, and instead read economics and agricultural economics at the University of Exeter.
Feeling he had outgrown Invesco Perpetual, he set up his own firm Woodford Investment Management in 2014, on an industrial estate near Oxford. Within two weeks of launching, he had raised £1.6bn, a UK record, and it quickly grew to £16bn. In its first full year his flagship fund returned 16% and Woodford, a devotee of veteran US investor Warren Buffett, was dubbed the “Oracle of Oxford”.
Asked if he ever doubted his judgment, Woodford once said: “Daily. You must never, as a fund manager, stick your head in the sand saying ‘everybody go away, I’m right, I’m right, I’m right’. You’ve always got to expose yourself to criticism and the analysis that you may be wrong.”
Woodford went on to say that the secret of successful fund management was a balance of arrogance and humility. “You have to have a sufficiently strong arrogant gene to back your judgment, back your conviction. If you didn’t, you would end up with a portfolio that looks very much like the index. But, equally, you must have the humility to accept that you will get things wrong.”
At the end of March, Bailey wrote, the watchdog became “aware of press articles” about some investments in the Equity Income Fund being listed on the Guernsey exchange. That move, which is entirely legal, allowed the fund to stay within the 10% EU limit for the proportion of unlisted investments which can be held in such a fund.
The letter also revealed that from 24 April this year Link was providing daily updates about the rate of withdrawals from the underperforming fund.
Bailey said Woodford was allowed to earmark unlisted shares for a listing in Guernsey to avoid falling foul of the rules, but that the rules should be revisited, because a listing on the Guernsey exchange did not necessarily mean the shares could be sold more easily.
Bailey and the FCA chairman, Charles Randell, will be grilled over the Woodford debacle next week when they give evidence to the Treasury select committee.
The news of the formal investigation came as Fidelity banned its customers from putting money into another of Woodford’s funds.
The investment platform, one of Britain’s biggest said it was halting new investments in the £325m Woodford Income Focus Fund, a sister fund to the Equity Income Fund. The Income Focus Fund is not suspended and investors can still withdraw their cash.
A Fidelity said: “We believe this is in the best interest of our platform clients, unless and until, uncertainties are resolved.” It said the restrictions were “temporary and precautionary.”
A Woodford spokesperson said: “The fund was set up with the aim to deliver an income of 5p per share per annum, which it has achieved. The fund mainly invests in companies that pay a dividend and, ever since its launch, the portfolio has contained a combination of large, mid- and small-sized companies.
“It doesn’t have any exposure to illiquid or unquoted securities and consequently isn’t exposed to the same issues that the Woodford Equity Income Fund is. ”
Shares in Woodford’s FTSE 250-listed vehicle, Patient Capital Trust, slumped to a fresh low of 51.8p on Tuesday. They have fallen almost 33% since Woodford’s flagship fund was suspended.
Fidelity’s move emerged as Bank of England policymaker Anil Kashyap warned that if the Woodford debacle were to undermine confidence in the financial system, it could become a very big problem, and that the central bank was watching closely.
Kashyap told Morgan’s Treasury select committee: “I don’t think Woodford per se creates financial stability risk, but if it undermines confidence in the system it could be a very big problem.”
Kashyap, a member of the Bank’s financial policy committee, added: “It’s a very visible thing, it’s got people worrying about whether or not this is going to be present elsewhere. We are going to keep watching it and if it ever gets to the point where there’s substantial assets in a vehicle like that, that could give rise to widespread spillovers, we’d have to do something about it.”
